RATIO ANALYSIS

- Rahul khubani

INTRODUCTION• NAME- Rahul Shyamlal Khubani• Roll no.-49 DIV.-2• Specialization – Finance• Topic – Ratio Analysis• Company – Virat Industries Ltd.

Company ProfileNAME Virat Industries Ltd.

REGISTERED OFFICE A-1/2,GIDC, Industrial Estate, Kabilpore, Navsari.

HEAD OFFICE Mumbai

YEAR OF ESTABLISH 1995

TYPE OF COMPANY Medium Scale,Public Ltd. Company,100% Export Oriented Units

COMPANY BUSINESS Virat Ind. Ltd. Manufacturers international quality cotton-rich socks & export to European market

PLANT CAPACITY 2.5 million pairs per annum

CORE COMPETENCE World class quality control & technology

SOURCE OF FINANCE Share Capital:- Rs. 4.92 CrorersBorrowing:- Rs.12.27 Crorers

AUDITORS M/s. Deloitte Haskins and Sells.

BANKERS IDBI & Bank of Baroda

MAJOR SUPPLIERS• 1) COTTON DYED YARN • Gokak Mills, Gokak Falls, Karnataka, India.• Mahavir Spg Mills Ltd, Hosiarpur, Punjab, India.• Arihant Spg Mills, Malerkotla, Punjab, India.• • 2)WOOLLEN YARN• • Woollen yarn is purchased from Jayshree Textile Mills, Calcutta.• • 3) NYLON DYED YARN • Scan Synthetics Ltd, Alwar, Rajasthan, India.• Sarla Polyesters Ltd, Vapi, Gujarat, India.• • 4) LYCRA/ELASTON – both ecru and dyed • Sarla Polyesters Ltd, Silvasa, India.

SALES (Rs.)Year Sales (Rs.)

2005-06 80271016

2006-07 93192790

2007-08 94547547

2008-09 129454564

2009-10 124814478

2005-06

2006-07

2007-08

2008-09

2009-10 0

40000000

80000000

120000000

Sales (Rs.)

Sales (Rs.)

Major Customer

• Major Customers• The company exports its 100% production to foreign markets

including• U.K 25%• Switzerland 70%• Dubai 05%

Product TypesVirat Industries ltd. Is engaged in producing cotton dressed knitted socks.

Types of socks• 100% cotton socks• 100% mercerized• Cotton ground with nylon plating• Cotton ground with lycra plating• Design socks• Ribbed & Link Socks • Jacquard Socks• Woolen socks• Elastance socks

Objective• To Study the various Ratios of Virat industries ltd.• To Study the performance of the company based on ratio analysis.• To find out the effectivity & efficiency of the company.• To know the general export procedure of the company• To ask advantage of export market for our product due to globalization

and liberalization and government policies from time to time.

LIMITATION• Time is a big constraint to study the project in sufficient detail.• Findings and conclusion made as per my limited knowledge• Cost is another factor restricting the in depth study.• As this is the public firm so data provided me are of secondary.

Production ProcessCustomer Requirement

Sample Production

Sample Approval By Customer

Final Placement of order to the head office

Preparation of yarn Requirement by Production Department

Sample Preparation and Approval by Quality Control Department.

Final Production.

Finishing of the Product in Financing Department

Product process

Knitting Machine

Hand linear Machine and linear Linking Machine

Turning Machine

Boarding machine

Pairing machine

Packing Process

RATIO ANALYSIS• Ratio analysis is powerful tool of financial Analysis. A Ratio is defined as “the relationship

between two or more things”. In Financial analysis, A Ratio is used as a benchmark for evaluating the financial position & performance of a firm. An accountings figure conveys meaning when it is related to some other relevant information. For example, a Rs. 5 crore net profit may look impressive, but firm’s performance can be said to be good or bad only when the net profit figure is related to the firm’s investment . So , the relationship between two accountings figures expressed mathematically, is known as financial ratio or simply as a ratio. An investor is in information regarding the exact financial position of the business, its profitability & future possibility of the company. Ratio’s help to summarize the large quantities of financial data & to make the qualitative judgement about the firm’s financial performance. The greater the ratio, greater the firm’s liquidity & vice versa. So, the point to note is that a ratio indicates a qualitative relationship, which can be in turn, used to make qualitative judgement such is the nature of all financial ratios. The ration analysis involves comparison for a useful interpretation of the financial statements. A single ratios in itself does not indicate favorable or unfavorable condition. It should be compared with some standards. Standards of comparison may consist of past ratios, projected ratios, competitor’s ratios , industry ratios etc..

Limitation of Ratio Analysis• It is a difficult to decide on the proper basis of comparison • The comparison is rendered difficult because of differences in situation of two companies or

of one company over years.• The price level changes make the interpretation of ratios invalid.• The differences in the balance sheet & profit & loss statement make the interpretation of

ratios difficult.• The ratios calculated at a point of time are less informative & defectives as they suffer from

short-term changes.• The ratios generally calculated from past financial statements & thus are no indicators of

future.

Resarch Methodology

• PRIMARY DATA:-

I have collected most of the data from the managers by asking questions because it is difficult to me to understand the study.

So it might be possible that my project is totally based on the information given by the company.

• SECONDARY DATA:-

I have collected some of the information from various reference books and financial statement, which are mentioned in bibliography.

Types of Ratio

• Liquidity Ratio• Leverage Ratio• Turnover Ratio• Profitability Ratio

Liquidity Ratio• Liquidity Ratio measures the firm’s ability to meet current obligations & are

calculated by establishing relationship between current assets & current liability. These ratios indicates the position of liquidity. The importance of adequate liquidity in the sense of the ability of a firm to meet short- term obligations when they become due for payment can hardly be over stressed. In fact, liquidity is a pre-requisite for the very survival of firm. A firm should ensure that it does not suffer from the lack of liquidity & also that it does not have excess liquidity. The failure of a company to meet its obligations due to lack of sufficient liquidity, will result in a poor credit worthiness, loss of creditor ‘s confidence, or even in legal tangles resulting in the closure of the company. A very high degree of liquidity is a bad, idle assets earn nothing. A proper balance between the two contradictory requirement i:e liquidity & profitability is required for efficient financial management. For example, current ratio shows the capacity of a firm to meet its current liabilities as & when they mature

Current Ratio• Current Ratio : The current ratio is measure of the firm’s short-term solvency.

Current ratio indicates the working capital position. Normally this ratio should be 2:1. This ratio of company is marginally satisfactory because this ratio shows a comfortable working position over the stipulated ratio of 2:1. The company is higher than the ideal position of the current ratio

Year C.A C.L Ratio

2005-06 26050080 9539378 2.73:1

2006-07 29882847 21506112 1.39:1

2007-08 27695624 14405703 1.92:1

2008-09 44897440 10769343 4.17:1

2009-10 61596254 25677752 2.40:1

ACID-TEST RATIO

• It is a measurement of a firm’s ability to convert its current assets quickly into cash in order to meet its current liabilities

• In general, there is a lot of fluctuation in the Acid-test ratio of company. This is due to cyclical fluctuation in the industry. Generally, an acid-test ratio is 1:1 is considered satisfactory as a firm can easily meet all current claims. The acid-test ratio provides, in a sense, a check on the liquidity position of a firm as shown by its current ratio.

Year Quick Assets Liquid Liability Ratio

2005-06 13583255 9539378 1.42:1

2006-07 11873406 21506112 0.55:1

2007-08 11223944 14405703 0.78:1

2008-09 26114706 10769343 2.42:1

2009-10 27478507 25677752 1.07:1

CASH RATIO• Cash Ratio is also known as “Liquid Ratio “. The liquidity ratios of a firm throw light

on the ability of a firm to pay its current liabilities.

• CONCLUSION• If the current assets are equal to or more than current liability, the conditions of

the cash ratio of company is satisfactory. The cash ratio of company is marginal satisfactory although are fluctuation it the ratio is 1:1.

Year Liquid Assets Liquid Liabilities Ratio

2005-06 13583255 9539378 1.42:1

2006-07 11873406 21506112 0.55:1

2007-08 11183944 14405703 0.78:1

2008-09 26114706 10769343 2.42:1

2009-10 27478507 25677752 1.07:1

Leverage Ratio• Leverage ratio measure the proportion of outsiders capital in financing the firm’s

assets & are calculated by establishing relationship between borrowed capital & equity capital. The process of magnifying the share holder’s return through the employment of debt is called “financial leverage”. In fact, a position. To judge the long term financial position of the firm financial leverage or capital structure, ratios are calculated. These ratios indicate mix of funds provided by owners & lenders.

• The manner in which asset are financed has number of implications. First, between debt & equity, debt is more risky from the firm’s point of view, the firm legal obligation to pay interest to debt holders. Second, employment of debt is advantageous for shareholders. So, in addition, there is threat of solvency. Third, a highly debt burdened firm will find difficulty in raising funds from creditors & owners in future.

• Thus, leverage ratio may be calculated from the balance sheet items to determine the proportion of debt in total financing. Leverage ratio are also computed from the P & L items by determining the extent to which operating profits are sufficient to cover the fixed charge.

Debt-Equity Ratio• The Relationship describing the lender’s contribution for each rupee of the

owner’s contribution is called debt-equity ratio.

• CONCLUSION• Here debt equity ratio is continuously decreasing. Despite the difficult times in the

industry the company made the valiant effort to decrease the debt.

Year Debt Equity Ratio

2005-06 40569911 44310000 0.82:1

2006-07 30418849 49233400 0.61:1

2007-08 25848718 49233400 0.53:1

2008-09 17981866 49233400 0.36:1

2009-10 12275041 49233400 0.25: 1

OWNER’S RATIO• The ratio indicates the proportion of total assets financed by owners.

• CONCLUSION• Owner’s ratio cannot exceed to 100%. It means that the business does not use

outside fund, there are no outside liability. The higher the ratio, the stronger that the proprietor have provided larger funds to purchase the assets.

Year Owner’s Fund Total Assets Ratio

2005-06 49233400 82715987 59.52%

2006-07 49233400 95715695 51.44%

2007-08 50676448 77640945 65.27%

2008-09 66100407 91593574 72.17%

2009-10 91593574 97369004 94.07%

TURNOVER RATIO• Turnover ratio reflects the firm’s efficiency in utilizing its assets in generating sales

& are calculated by establishing relationship between between sales & assets. The liquidity ratios discussed so far relate to the liquidity of a firm as a whole. Funds of creditors & owners are invested in various assets to generate sales & profits. The better the management of assets, the larger amount of sales. Turnover ratio are employed to evaluate the efficiency with which the firm manage & utilizes its assets. They indicate the speed with which assets are being converted or turned over into sales. Thus turnover ratio involves relationship between sales & assets. A proper balance between sales & assets generally reflects that assets are managed well. Turnover ratio is also known as “Activity Ratio”

INVENTORY RATIO• This ratio indicates the efficiency of a firm in selling its product. The number of times the avg. stock

or inventory is turned over the year is known as inventory turnover or stock turnover.

• CONCLUSION• inventory turnover is lower, so the company inventory ratio is fluctuating . So the ratio is not upto

the satisfactory level. A high ratio is goods sold from the viewpoint of liquidity. A low ratio would signify that inventory does not sell fast & stays on the shelf or in the warehouse for a long time.

Year Sales Avg. Inventory Ratio

2005-06 80271016 11541838 7.0 times

2006-07 93192790 15238133 6.1 times

2007-08 94547547 17240561 5.4 times

2008-09 129454564 17627207 7.3 times

2009-10 124814478 26450240 4.72 times

Debtors Turnover Ratio• The ratio measure how rapidly debts are controlled

• CONCLUSION• The higher debtors turnover suggests that company is more profitable. That means

the company collection remains stable over the year. A high ratio is indicative of short time lag between shows that debts are not being collected rapidly.

Year Sales Avg. Debtors Ratio

2005-06 80271016 10783943 7.4 times

2006-07 93192790 9446912 9.8 times

2007-08 94547547 8041633 11.7 times

2008-09 129454568 9051551 14.3 times

2009-10 124814478 9275234 13.5 times

Average collection period• The average collection period measures the quality of debtors since it indicates the

speed of their collection.

• excessively long collection period implies a very liberal & inefficient credit & collection performance. Short collection period implies a very strict & efficient credit & collection performance. Short collection period increase the firms liquidity. So it is satisfactory

Year Avg. Debtors Avg. Daily Sales Ratio2005-06 10783943 219920.6 49 days

2006-07 9446912 255322.7 37 days

2007-08 8041633 259034.3 31 days

2008-09 9051551 354670.0 26 days

2009-10 9275234 341957.5 27 days

Creditors Turnover• The extent to which trade creditors are willing to wait for payment can be

approximated by the creditors turnover ratio.

• Conclusion• A low turnover ratio reflects liberal credit terms granted by supplier. While a high

ratio shows that accounts are to settled rapidly. The cash cycles captures the inter relationships of sales, collection from debtors & payment of creditors. So, overall this shows that credit turnover has fluctuating trend. So it is not satisfactory.

Year Credit Purchase Avg. Creditors Ratio

2005-06 12466825 7988310 2.00 times

2006-07 18009441 13425945 1.00 times

2007-08 16471680 15755657 1.00 times

2008-09 18782734 10543313 1.78 times

2009-10 34117747 12541150 2.72 times

Profitability Ratio• Profitability Ratio measures the overall performance of the firm by

determining the effectiveness of the firm in generating profit & are calculated by establishing relationship between profit figured on the one hand, & sales & assets on the other.

• Net profit Ratio• Return on shareholder’s Equity• EPS

Net Profit Ratio• It indicates the managements efficiency in manufacturing, administrating & selling the products. This ratio

is the overall measure of the firm’s ability to turn each rupee sales into net profit.

• CONCLUSION• As I analyze the data of the company according to net profit ratio, we delivered it by dividing net profit or

loss with of sales. So it was fluctuating as per the profit or loss. A low net profit margin cam earn low rate of return on investments it it has a higher inventory turnover. A high net profit margin would ensure adequate to the owners as well as enable a firm to withstand adverse economic condition.

Year Profit/Loss Sales Ratio

2005-06 8921064 80271016 11.11%

2006-07 11184036 93192790 12.00%

2007-08 6650555 94547547 07.03%

2008-09 18304116 129454564 14.14%

2009-10 14602823 124814478 11.70%

Shareholder’s Equity Ratio• Return on Shareholder’s Equity measures the return on the total equity funds of

ordinary shareholders.

Conclusion• As I analyze the data of the company the ratio of return of share holder’s equity is

fluctuating. But it is the upto satisfactory level. In last two years company return on equity is increased.

Year Profit/Loss Shareholder’s Equity

Ratio

2005-06 8921064 49233400 18.12%

2006-07 11184036 49233400 22.72%

2007-08 6650555 49233400 13.50%

2008-09 18304116 49233400 37.18%

2009-10 14602823 49233400 29.67%

Earning Per Share • Earnings per share measures the profit available to the equity shareholders on per share

basis. It is not the actual amount paid to shareholders as dividend but is the maximum that can be paid to them

• Conclusion• By analyzing the EPS of the company, the performance of the company is marginally

satisfactory. In last two years company performance is increased.

Year Profit/Loss No. of Share Rs.

2005-06 8921064 4923340 1.81

2006-07 11184036 4923340 2.27

2007-08 6650555 4923340 1.35

2008-09 18304116 4923340 3.72

2009-10 14602823 4923340 2.97

FINDINGS• Liquidity ratios of a company are satisfactory.• Leverage ratios are also satisfactory.• Turnover ratios are marginally satisfactory.• Profitability ratios are also marginally satisfactory.

Good Things Of the Organization

• Discipline and Punctuality of all the employees• Regular payment of salary and wages to all employees,• Clean and healthy environment.• Co-operative and supportive staff.

Bibliography

• Khan and jain • I.M.Pandey• 5 years financial statement.

Thank You